WASHINGTON – The Medicare trust fund will be exhausted by 2017, two years earlier than originally projected, according to the annual report released in summer 2009 by the Medicare Trustees.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. In the 2009 report, the Trustees revealed “projected long run program costs are not sustainable under current program parameters.”

Medicare’s financial difficulties are much more severe than those confronting Social Security. While both programs face demographic challenges, the report noted, rapidly growing healthcare costs also affect Medicare.

“The longer we wait to address the long-term solvency of Medicare … the sooner those challenges will be upon us and the harder the options will be,” said Timothy Geithner, U.S. Treasury Secretary and the chief Medicare Trustee.

Underlying healthcare costs per Medicare enrollee are projected to rise faster than the earnings per worker on which payroll taxes and Social Security benefits are based. Medicare’s annual costs were 3.2 percent of the Gross Domestic Product in 2008, equivalent to $468 billion, or about three-quarters of Social Security’s. They are projected to surpass Social Security expenditures in 2028 and reach 11.4 percent of the GDP in 2083.

Health and Human Services Secretary Kathleen Sebelius, who serves as a Trustee, said the report should serve as a “wake-up call” for everyone concerned about Medicare.

“Just as families, communities and businesses are struggling under the crushing burden of skyrocketing healthcare costs, so too are our Medicare Trust funds,” she said. “This isn’t just another government report. It’s yet another sign that we can’t wait for real, comprehensive health reform.”

The Trustees’ report notes that the projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is now 3.88 percent of taxable payroll, up from 3.54 percent projected in last year’s report. The fund failed the Trustees’ test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years – by 2012.

The fund also failed the long-range test of close actuarial balance by a wide margin. The 2017 projected date of trust fund exhaustion is when dedicated revenues would be sufficient to pay 81 percent of HI costs. The report shows that projected HI dedicated revenues fall short of outlays by rapidly increasing margins in all future years.
The Trustees said “substantial” changes would be necessary to ensure uninterrupted provision of services to Medicare beneficiaries and the program’s solvency.

The HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent) or an immediate 53 percent reduction in program outlays or some combination of the two, the report said.

Larger changes would be required to make the program solvent beyond the 75-year horizon.

“We need to act now to address Medicare’s fiscal sustainability,” said Sen. Charles Grassley (R-Iowa), ranking member of the Senate Finance Committee. “Necessary policy reforms to add efficiency and improve Medicare’s fiscal health without cutting benefits will take time to implement. If Congress waits, the savings from those changes won’t materialize until after the program becomes insolvent. At that point, the only options would be cutting provider payments, reducing benefits, or raising payroll taxes.”

There was some relatively good news in the Trustees’ report.

Part B of the Supplementary Medical Insurance Trust Fund, which pays physician bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs.

However, the report noted that expected steep cost increases would result in rapidly growing general revenue financing needs – projected to rise from 1.3 percent of GDP in 2008 to about 4.7 percent in 2083 – as well as substantial increases over time in beneficiary premium charges.